Fitch Rates $299MM Mississippi GO Bonds 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'AA' rating to the following general obligation (GO) refunding bonds of the state of Mississippi:

--$217.865 million series 2016B (Tax-Exempt);

--$81.5 million taxable series 2016C .

The bonds are expected to sell via negotiation on or about Dec. 6, 2016.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the state, with its full faith and credit pledged.

KEY RATING DRIVERS

The 'AA' GO and Issuer Default Rating (IDR) reflect the state's strong control over spending and revenues and generally conservative financial practices, providing significant financial resilience. Liability levels are moderate, albeit well above average for a U.S. state, while economic growth is likely to be below average.

Economic Resource Base

Mississippi's economy continues to diversify beyond its historical concentration in manufacturing and some successful economic development initiatives should bolster employment in the coming years. The state's socio-economic profile is relatively weak for a U.S. state, with wealth and educational attainment indicators that significantly lag national levels.

Revenue Framework: 'aa' factor assessment

Mississippi's broad based revenues, including sales and incomes taxes, reflect its economy and the expectation of a relatively slow rate of growth. The state has complete control over its revenues.

Expenditure Framework: 'aaa' factor assessment

Spending growth is expected to be at or slightly above relatively slow annual revenue growth in the absence of policy action, reflecting the primary drivers of education and Medicaid. The state has ample ability to control expenditures and carrying costs for debt service and retiree benefits are low.

Long-Term Liability Burden: 'aa' factor assessment

Mississippi's liabilities are above average for a U.S. state but still a moderate burden on resources.

Operating Performance: 'aa' factor assessment

Strong control over spending and maintenance of reserves provide the state with ample capacity to address a moderate downturn scenario. Mississippi's budget performance during this period of economic expansion has been uneven, with slow return to budgetary balance.

RATING SENSITIVITIES

The State of Mississippi's IDR is sensitive to continued maintenance of financial flexibility consistent with the 'AA' rating.

CREDIT PROFILE

Mississippi's employment base, when compared nationally, is overweight in the more volatile manufacturing sector. The state lost jobs in the recession generally in line with the U.S. experience; however, Mississippi has lagged the U.S. in the recovery and employment growth has not been consistent. Manufacturing employment is modestly growing, but service sector employment, which is a source of growth nationally, is relatively weak in Mississippi. The state has invested in economic development projects designed to diversify and expand the economy, and Fitch expects continued moderate growth in line with recent trends.

Revenue Framework

Mississippi's revenue structure is diverse, relying on sales taxes (37% of fiscal 2016 state general fund revenues), personal income taxes (32%) and corporate income taxes (11%).

Historical revenue growth through 2014, adjusted for the estimated impact of tax policy change, was slightly above GDP growth, exceeding what economic output would imply; population, employment, personal income, and state GDP growth have all lagged the U.S. over this time period. Several factors contributed to stronger revenue growth during the measurement period, including spending post-Hurricane Katrina in the last decade, better collection mechanisms, and more recently, reported employment outside of the state in the oil and gas industry that is captured in tax revenues but not necessarily in a local economic impact. Fitch believes future revenue growth is likely to be more in line with inflationary growth, reflecting the slower state economy and reduced employment in the oil and gas industry.

As with most states, Mississippi has an unlimited legal ability to raise revenues.

Expenditure Framework

As with most states, education and social welfare spending are Mississippi's largest operating expenses. Education, including public and higher education comprises more than half of general fund spending, while health and social welfare adds another approximately 20%. Medicaid is a key driver to social welfare spending.

Spending growth, absent policy actions, will likely be in line with to marginally above expected revenue growth, driven in part by Medicaid spending, and will require continued budget management to achieve balance. The fiscal challenge of Medicaid is common to all U.S. states and the nature of the program as well as federal government rules limit the states' options in managing the pace of spending growth. Medicaid spending has increased in Mississippi despite the state not opting to expand the program under the Affordable Care Act and despite the state receiving a very high federal matching rate due to its comparatively low income levels.

Mississippi has ample expenditure flexibility. The state has reduced spending when necessary to maintain budgetary balance, even in core spending areas. The state's carrying costs for debt and retiree benefits are just below the state median and are expected to remain low.

Long-Term Liability Burden

Mississippi's liabilities are above average for a U.S. state but are expected by Fitch to remain a moderate burden on resources. The most recently reported combined total of debt and unfunded pension liabilities (adjusted by Fitch for a 7% return assumption) equals 8.7% of 2015 personal income as compared to a median of 5.1%. Mississippi is ranked 38th of the states by this measure.

As reported under the new reporting requirements of GASB 67/68, the PERS fiduciary net position as a percentage of the total pension liability was 61.7% as of June 30, 2015. The state has a history of making its full actuarial contribution and recently tightened actuarial assumptions to increase the likelihood of making progress on funding, assuming asset returns match the lowered assumption. Fitch notes that the demands of debt and pensions on the state's operating budget continue to be moderate.

Operating Performance

Mississippi has a strong framework to address a moderate downturn scenario. The governor has the authority to draw $50 million from the rainy day fund without requiring legislative action. A larger withdrawal requires legislation, as happened at the end of fiscal 2016, when a budget gap developed late in the fiscal year. Further, the governor can make budgetary reductions up to 5% per agency and transfers between funds without legislative action, and reductions in excess of 5% as long as the reductions are a uniform percentage for all agencies, providing a great deal of flexibility to address revenue shortfalls. By statute, the state only appropriates 98% of estimated revenue; however, in Fitch's view, repeated suspension of the set-aside lessens its value as a budget control mechanism.

Mississippi took several actions to balance the budget through the great recession, relying most heavily on spending reductions, but also incremental usage of the rainy day fund, uses of balances in other funds, and an increase in tobacco taxes. The gradual draw-down of the rainy day fund, which had reached $362 million in fiscal 2008 (7.5% of general fund revenues), allowed the state to manage reductions in tax revenue associated with the recession. Fitch expects the state would take similar actions to maintain balance in future downturns.

Mississippi's budget performance during this period of economic expansion has been uneven. As revenues began to rebound following the recession, the state continued to use balances in the rainy day fund for budget balancing purposes, while also actively controlling spending, in part to cover increased expenses related to Medicaid growth. As stronger revenue growth took hold, the state reinstated 98% budgeting, and began to replenish reserves, including rebuilding the diminished rainy day fund. This was notable in fiscal 2014 when the state was able to forgo an expected draw on the rainy day fund and instead, made a sizeable contribution. Fiscal 2015 performance was in line with budget, and the state ended the year with its rainy day fund at its statutory maximum of 7.5% of appropriations.

The fiscal 2016 budget assumed continued modest revenue growth and funded increases in the two main spending categories, both K-12 education and social welfare (primarily Medicaid). The budget as enacted was narrowly balanced and utilized a small unappropriated fund balance but otherwise did not rely on one-time revenues. As was the case in fiscal 2015, the state suspended its 98% budgeting policy for fiscal 2016, citing its fully funded rainy day fund. As revenues began to underperform during the fiscal year, the state took repeated action to achieve budgetary balance, including reducing expenditures and drawing on the rainy day fund. The state utilized $104 million of rainy day reserves both prior to the end of the fiscal year and during the lapse period as fiscal 2016 spending was finalized, leaving the rainy day fund with a balance of $313.5 million as of September 30, 2016 (approximately 5.6% of expected fiscal 2017 revenues).

The fiscal 2017 enacted budget assumes slower revenue growth, but may face similar pressure to remain in balance. A reported mistake in revenue estimation opened an immediate $57 million gap that was closed with 1.6% budget cuts to most agencies; but with revenues slightly underperforming in the first quarter, this does point to the need for ongoing budget management to sustain balance. The enacted budget again suspends the 98% budgeting mechanism.

Date of Relevant Rating Committee: July 15, 2016

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

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Fitch Ratings
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Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eric Kim
Director
+1-212-908-0241
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eric Kim
Director
+1-212-908-0241
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com